Reporter's notebook 'They do it because they think they can get away with it'

Korea Inc. grapples with growing embezzlement cases

By Lee Kyung-min

What do steel manufacturers, electrical device makers, banks, savings banks, securities firms, community credit cooperatives, cosmetics firms and telecommunication service providers have in common?

Do they even have anything in common at all ― many would ask ― other than that they are very profitable businesses and possess huge cash reserves?

This probably makes it easier to understand how and why it happened ― a dozen alleged embezzlement and fraud cases totaling hundreds of billions of won ($1=1,310 won) over the course of the past few years. People are still having a hard time grasping how such acts went unnoticed for months, or years on end.

Chief among the contextual factors is that many of the alleged perpetrators were saddled in debt after investing in stocks and cryptocurrencies, the two most volatile vehicles of investment that thrived over the past few years on cheap liquidity. The COVID-19 pandemic sparked an expansionary monetary policy and fiscal stimulus measures, defined by record-low borrowing rates.

“Desperate people will do desperate things” might be one saying that could help explain why they did what they knew was clearly wrong. Or, did they know it at all?

Experts say the alleged embezzlers might have sought to put the money back, as soon as they recovered losses from their investments. But things didn't go the way they planned.

A prevalent belief among the alleged perpetrators was that they were caught only because they were unlucky and not because what they did was wrong, lacking entirely in remorse, morality or a sense of shame and self-reflection.

It is, to anyone with common sense, a repulsive attempt to justify their criminal behavior by distracting focus and pointing fingers at others, the worst kind of irredeemable attitude imaginable.

Perhaps the only thing on their minds was the pressure to meet margin calls or have their assets forcibly liquidated the next day, while being oblivious about how the fear was making them short-sighted neglecting the consequences of their extremely risky actions.

The focus is now switching to fortifying internal management oversight and audits, a responsibility of the regulatory Financial Supervisory Service (FSS). Many say it is a sad acknowledgment that only the fear of punishment will prevent such crimes.

Statistics Korea data showed the number of embezzlement cases in the country soared to 65,539 in 2020, more than double from 27,882 cases in 2011. This is twice as fast as the increase in other financial crimes that rose about 50 percent year-on-year on average over the same period.

Embezzlement after embezzlement

A number of major Korean companies have come under fire for alleged embezzlement and fraudulent business transactions by employees involving somewhere between 200 million won to more than 221 billion won since January.

The latest case involves Hyundai Steel, where an in-house investigation is ongoing over suspicions that an employee netted up to 10 billion won in undue profits from falsifying documents to inflate the cost of key parts and sent out orders to a paper firm he set up. The firm declined to comment on the specifics of the ongoing investigation. Whether the case will be referred to the police is expected to be decided after the investigation is over.

This is the latest embarrassment for the Hyundai Motor Group affiliate, because another employee was arrested in October last year for pocketing billions of won after selling stolen nickel.

The most prominent case happened at Osstem Implant, a dental implant manufacturer where a former finance department manager surnamed Lee stole 221 billion won of the company's money. He was arrested and indicted for embezzlement.

Other cases of embezzlement happened at Keyang Electric Machinery (24.5 billion won), cosmetics firm AmorePacific (3 billion won), cosmetics firm Clio (1.9 billion won) and Lotte Corp. (7 million won).

Financial services firms reported similar instances.

A Woori Bank employee embezzled 61.4 billion won by falsifying documents over the course of six years, followed by KB Savings Bank (9.4 billion won), MG Community Credit Cooperatives (4 billion won) and Shinhan Bank (200 million won).

Snowballing debt and stagnant salaries

Many of the alleged perpetrators said they used the money to invest in real estate, stocks and cryptocurrencies. The need for lump-sum funds was more immediate for those who took out loans including high-interest, high-risk margin loans.

But what they failed to understand was that leveraged investments can deliver handsome profits in a short period of time, but the losses can come just as fast.

“The cheap money found its way into the financial investment market early on in the pandemic and stayed there for years after that,” said Lee In-ho, former chairman of the Korean Economic Association. “Now, the sharp increase in borrowing costs is leaving many wondering whether taking out such huge loans beyond their means was a good decision.”

Almost all of them might have thought they could put the money back and that no one would notice if they acted fast. No one other than finance department employees would care to open up their employer's account books to see if all of the money was all there. But this ended up being a gross miscalculation that led to a whole new set of uncontrollable risks.

“They do it essentially because they think they can get away with it,” Lee said. “However good their initial intentions might have been, there will and should be consequences.”

Further fanning the spread of white-collar crimes is lenient punishment, according to Han Sang-man, president of the Korean Academic Society of Business Administration.

Supreme Court sentencing guidelines recommend a prison term of between four and seven years for embezzlement involving between 5 billion won and 30 billion won. The term is between five and eight years, if the amount exceeds 30 billion won.

“Salaried workers are seeking windfall gains out of frustration with the stagnant monthly income that barely keeps pace with surging inflation. The relatively lenient punishment for financial crimes could be no more than a simple cost-benefit issue for some,” Han said.